Medical Loss Ratio Rebates – What Should an Employer Do?

By: Sherry Porter

The Patient Protection and Affordable Care Act (ACA) made many changes to the way the American health care system worked. One such change requires insurers to use a certain amount of insurance premiums to provide medical care (at least 80% in the small group market, 85% in the large group market) effectively limiting the insurer’s profit.  The percentage of premiums spent on medical care and services, known as the Medical Loss Ratio (MLR), is calculated annually by each insurer and is reported to the U. S. Department of Health and Human Services.  If the insurer determines that it did not meet this requirement, it must issue a rebate to policyholders by September 30. If your company sponsors a group health plan and receives a MLR rebate, you should step cautiously to ensure that the rebate is properly handled.

So, what should an employer do if they receive a rebate from an insurer?  First, review the governing health plan document to determine if the rebates are addressed in the plan document (many plan documents do not go into that much detail, but if there is a provision, the employer should follow that as they are required to follow their plan document).  From there, the employer needs to determine the plan or plans to which the rebate applies (if they offer more than one option, the rebate may apply only to one plan like a PPO or to more than one plan). 

If employees paid any portion of the premium, then the portion of the rebate attributable to employee contributions would be considered plan assets and must be handled as such under the Employee Retirement Income Security Act (ERISA).  This means that the portion of premium paid by the participants will be considered plan assets and that ratable portion of the rebate should be used to benefit those plan participants.  The plan sponsor generally has some discretion to allocate that rebate among plan participants (subject to ERISA fiduciary rules and taking into consideration that the allocation method must be reasonable, fair and objective). The basic options available include a premium reduction for plan participants, benefit enhancements, refund directly to participants or a premium holiday.  The guidance from the U. S. Department of Labor, Employee Benefit Security Administration (which enforces ERISA) also provides some exceptions in the event distributing the rebate is not feasible (for example, the cost to make a distribution of the rebate exceeds the amount of the rebate) and there are other nuances as well.  If your company gets a MLR rebate, contact your legal counsel or insurance broker for guidance on how to handle the rebate – the methodology depends on various facts and a misstep can land an employer in hot water with potential violations of ERISA.

Sherry P. Porter

Sherry Porter has more than twenty years of experience in the employee benefits field.  She began her legal career as an investigator for the U.S. Department of Labor Employee Benefits Security Administration, where she conducted investigations to ensure compliance with ERISA and related laws and negotiated compliance agreements to correct violations.  Ms. Porter regularly advises clients on legislation affecting employee benefit plans, such as HIPAA privacy and security rules and the Patient Protection and... Read More